Halebian v. Berv, No. 07-3750 (2d Cir. 2011)
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Plaintiff appealed from a judgment dismissing a three-count complaint arising from the renegotiation of certain investment-advisory agreements. The court certified a question to the Supreme Judicial Court of Massachusetts as to the circumstances under which that state's business judgment rule could be asserted in response to a shareholder derivative suit under the Massachusetts Business Corporations Act, Mass. Gen. Laws ch. 156D, 5.44. Upon the receipt of the answer, the court affirmed the district court's dismissal of two of plaintiff's claims brought pursuant to various provisions of the Investment Company Act, 15, U.S.C. 80a-15(a), and Massachusetts state law. Regarding the third claim, a derivative state law claim for breach of fiduciary duty to which the certified question related and as to which the district court granted a motion to dismiss, the court vacated the judgement and remanded with instructions to convert the motion to dismiss to a motion for summary judgment, and to rule on that motion, after further discovery if further discovery was warranted.
This opinion or order relates to an opinion or order originally issued on December 29, 2009.
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07-3750-cv Halebian v. Berv 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2010 4 (Argued: 5 Question Certified: 6 February 5, 2009 December 29, 2009 Certified Question Answered: August 23, 2010 7 Decided: 8 Docket No. 07-3750-cv 9 ------------------------------------- 10 JOHN HALEBIAN, 11 Plaintiff Appellant, 12 - v - 13 14 15 ELLIOT J. BERV, DONALD M. CARLTON, A. BENTON COCANOUGHER, MARK T. FINN, STEPHEN RANDOLPH GROSS, DIANA R. HARRINGTON, SUSAN B. KERLEY, ALAN G. MERTEN, R. RICHARDSON PETTIT, 16 Defendants Appellees, 17 CITIFUNDS TRUST III, 18 Nominal Defendant Appellee.* 19 ------------------------------------- 20 Before: 21 May 6, 2011) SACK and PARKER, Circuit Judges, and STANCEU, Judge.** Appeal from a judgment of the United States District 22 Court for the Southern District of New York (Naomi Reice 23 Buchwald, Judge) dismissing a three-count complaint arising from The Clerk of Court is directed to amend the official caption as set forth above. * ** The Honorable Timothy C. Stanceu, of the United States Court of International Trade, sitting by designation. 1 the renegotiation of certain investment-advisory agreements. We 2 certified a question to the Supreme Judicial Court of 3 Massachusetts as to the circumstances under which that State's 4 business judgment rule may be asserted in response to a 5 shareholder derivative suit under the Massachusetts Business 6 Corporation Act. 7 district court's dismissal of two of the plaintiff's claims 8 brought pursuant to various provisions of the Investment Company 9 Act, 15 U.S.C. §§ 80a-15(a) & 80a-20(a), and Massachusetts state Upon receipt of the answer, we affirm the 10 law. 11 for breach of fiduciary duty to which the certified question 12 related and as to which the district court granted a motion to 13 dismiss we vacate the district court's judgment and remand with 14 instructions to the court to convert the motion to dismiss to a 15 motion for summary judgment, and to rule on that motion, after 16 further discovery should the court in the sound exercise of its 17 discretion determine that such further discovery is warranted. 18 Regarding the third claim a derivative state-law claim Affirmed in part; vacated and remanded in part. 19 20 21 22 JOEL C. FEFFER (Daniella Quitt, James G. Flynn, on the brief), Harwood Feffer LLP, New York, NY, for Plaintiff Appellant. 23 24 25 26 27 JAMES S. DITTMAR, Goodwin Procter LLP, Boston, MA (Michael K. Isenman, Matthew M. Hoffman, Goodwin Procter LLP, Washington, DC, on the brief), for Defendants Appellees. 2 1 SACK, Circuit Judge: 2 Descriptions of the facts underlying this appeal have 3 now been published in three different reported decisions in the 4 opinion of the United States District Court for the Southern 5 District of New York, Halebian v. Berv ("Halebian I"), 631 F. 6 Supp. 2d 284, 287 91 (S.D.N.Y. 2007); in this Court's previous 7 opinion certifying a question of state law to the Supreme 8 Judicial Court of Massachusetts, Halebian v. Berv ("Halebian 9 II"), 590 F.3d 195, 199 203 (2d Cir. 2009); and in the opinion of 10 the Supreme Judicial Court answering our question on 11 certification, Halebian v. Berv ("Halebian III"), 457 Mass. 620, 12 621 24, 931 N.E.2d 986, 987 89 (2010). 13 reiterate them here except insofar as we think it necessary to an 14 understanding of our resolution of the narrow issues remaining 15 before us. 16 We see no need to BACKGROUND 17 Halebian's Complaint 18 On May 30, 2006, John Halebian, a holder of shares in 19 one of six separate investment funds (the "Funds") within 20 CitiFunds Trust III (the "Trust"), a Massachusetts business 21 trust, filed a complaint raising three claims in the United 22 States District Court for the Southern District of New York 23 against members of the Trust's board of trustees (the "Board"). 24 The suit arose in connection with the June 23, 2005 corporate 25 sale (the "Transaction") of investment-adviser subsidiary 3 1 companies that advised the six Funds. 2 Transaction, Citigroup, Inc., which owned the adviser 3 subsidiaries, sold substantially all of its asset-management 4 business to Legg Mason, Inc., automatically terminating, under 5 federal law, the Funds' existing investment-advisory contracts. 6 Following the sale and contract termination, the Trust's Board 7 approved new investment-advisory agreements (the "New 8 Agreements") between the Trust and Legg Mason and then issued a 9 proxy statement to Trust shareholders recommending that they vote 10 11 Pursuant to the to approve the New Agreements. In his complaint, Halebian challenges two principal 12 aspects of the Transaction. First, he questions the New 13 Agreements' authorization of the payment of "soft dollars," which 14 permitted Legg Mason to hire broker dealers that also perform 15 research services a combination that often results in higher 16 commissions for the chosen broker dealer than those paid to 17 standard broker dealers. 18 voting procedures permitting "echo voting," which in this case 19 allows Citigroup-affiliated service agents, as record holders of 20 certain shares of the Funds, to vote their total number of shares 21 in proportion to the votes they received from the shares' 22 beneficial owners, even if the service agents had not received 23 voting instructions from all of their customers. 24 asserts, in sum, that the "defendants . . . failed to avail 25 themselves of the opportunity to negotiate lower fees or seek Second, he challenges shareholder 4 Halebian 1 competing bids from other qualified investment advisers" and 2 "utterly ignored their obligations of loyalty and good faith to 3 CitiTrust and its beneficiaries." 4 v. Berv, No. 06 Civ. 4099 (S.D.N.Y. May 30, 2006). 5 Complaint ¶¶ 35, 40, Halebian Halebian's Claim One, presented as a derivative claim 6 on behalf of the Trust, alleges that the defendants breached 7 their fiduciary duties to the Trust "in considering the . . . 8 [T]ransaction and in recommending the new advisory agreements." 9 Id. ¶ 54. Claims Two and Three, styled as direct claims, allege 10 that the defendants violated federal and state law by issuing 11 materially false and misleading statements and by omitting 12 material information from the proxy statement as part of an 13 effort to induce their shareholders to approve the Trust's New 14 Agreements with Legg Mason. Id. ¶¶ 60 61, 64 65. 15 The Defendants' Motion to Dismiss 16 On October 24, 2006, the defendants' counsel moved to 17 dismiss Halebian's complaint pursuant to, inter alia, Federal 18 Rule of Civil Procedure 12(b)(6). 19 Three, the defendants asserted that Federal Rules 12(b)(6) and 20 23.1, and various provisions of the Investment Company Act (the 21 "ICA"), 15 U.S.C. §§ 80a-15(a) & 80a-20(a), required dismissal of 22 the two claims because these claims were derivative in nature, 23 not direct, and as such failed as a matter of law. 24 addressing their requested dismissal of Claim One, the defendants 25 relied in part on a then-recently enacted provision of 5 Regarding Claims Two and Specifically 1 Massachusetts law codifying the business-judgment rule permitting 2 a corporation's directors to move to dismiss a derivative lawsuit 3 as to the prosecution of which the leadership concluded would not 4 be in the corporation's best interest.1 5 156D, § 7.44(a). See Mass. Gen Laws ch. 6 Our Prior Panel Opinion 7 In Halebian II, we agreed with the defendants and the 8 district court, classifying the second and third claims asserted 9 in the plaintiff's complaint as derivative by looking to 10 Massachusetts law, which all agree is applicable. 11 590 F.3d at 210. 12 claims as Halebian's challenge to the use of echo voting. 13 then reasoned: 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Halebian II, We saw the gravamen of the second and third We There is no indication that the alleged unlawfulness of echo voting under section 15(a) of the ICA or Massachusetts law was called to the attention of the Board by Halebian or anyone else prior to the institution of this lawsuit. And the Board has consistently and strenuously denied that echo voting violates these laws. Since the Board was apparently not of the view, nor had it been told, that using a Citigroupaffiliated service agent other than a broker dealer to echo vote shares violated the ICA or Massachusetts law, or indeed any law, its failure to inform shareholders to 1 The nominal defendant in this action is a business trust, not a corporation. However, as the Supreme Judicial Court explained, "[b]ecause a business trust in practical effect is in many respects similar to a corporation, the statute regulating derivative actions applies to a shareholder bringing such a claim against a corporation or a business trust." Halebian III, 457 Mass. at 623 n.4, 931 N.E.2d at 988 n.4 (citation and internal quotation marks omitted). 6 1 2 3 4 the contrary does not appear to us to have been potentially false and misleading so as to be cognizable under Massachusetts or federal law. 5 Id. (footnotes omitted). We thus expressed our inclination to 6 affirm the judgment of the district court (Naomi Reice Buchwald, 7 Judge) dismissing Halebian's second and third claims, but 8 declined to resolve them at that time. 9 those claims so that we could consider any commentary or analysis We reserved decision on 10 that the Supreme Judicial Court of Massachusetts might offer in 11 answering our certified question regarding Halebian's first 12 claim. 13 Id. As to Halebian's undisputedly derivative first claim, 14 which alleges a breach of fiduciary duty for failure to 15 investigate alternatives to the New Agreements between the Trust 16 and Legg Mason, we first rejected the district court's reliance 17 on Federal Rule of Civil Procedure 23.1 in dismissing the claim. 18 We were of the view that Halebian's complaint satisfied this 19 federal pleading rule for derivative claims and, accordingly, 20 that the claim thus "stands or falls on whether it was properly 21 dismissed pursuant to Massachusetts substantive law." 22 211. 23 that despite language in the state derivative-suit dismissal 24 provision indicating that it applies only to derivative 25 proceedings "commenced after the rejection of a demand," Mass. 26 Gen. Laws ch. 156D, § 7.44(a) (emphasis added), the defendants 27 could rely on the provision irrespective of the fact that the Id. at On the state-law question, the district court had ruled 7 1 plaintiff had filed suit before the Board's rejection of the 2 demand, provided they rejected the plaintiff's demand "after a 3 good faith review." Halebian I, 631 F. Supp. 2d at 294. 4 Proffering an alternative reading,2 but "declin[ing] to 5 resolve [the issue] in the first instance," Halebian II, 590 F.3d 6 at 210, we certified to the Supreme Judicial Court of 7 Massachusetts the following question: 8 can the business judgment rule, established under Mass. Gen. Laws 9 ch. 156D, § 7.44, be applied to dismiss a derivative complaint 10 "Under Massachusetts law, filed timely under section 7.42 but prior to a corporation's 2 In our previous opinion, we expressed skepticism about the district court's approach and conclusion, first noting that "it is a well-established principle of Massachusetts law that when 'the language of the statute is clear, we must enforce it according to its own terms.'" Halebian II, 590 F.3d at 212 (quoting Town of Milford v. Boyd, 434 Mass. 754, 757 58, 752 N.E.2d 732, 735 (2001)) (internal quotation marks omitted in original). Though we recognized that "context matters," we were "unconvinced that the statutory context required the district court to take the path that it did." Id. at 212 13. In light of commentary in the legislative record that "clearly anticipates that in some instances, a corporation might require more than ninety days to investigate and respond to the shareholder's demand," we conceded that section 7.44 might apply to some instances in which a suit was filed before a board's demand rejection. Id. at 213 (emphasis in original). But we concluded that if section 7.44 applied to all such instances, the need for a stay allowable by petition under section 7.43 of the statute would be nil. Id. We thus reasoned that the proper reading of the statute as a whole might be that section "7.44 applies to timely derivative actions filed before the rejection of the demand that serves as the basis for the action not in all circumstances, as the district court's ruling suggests, but only when such an action was actually stayed in accordance with section 7.43." Id. We found this reading to be consistent with statutory commentary and, as a matter of policy, that it would not impose "an unfair hardship on Massachusetts corporations." Id. at 213 14. 8 1 rejection of the demand that serves as the basis for the suit?"3 2 Id. at 214. 3 Supreme Judicial Court's Response 4 On August 23, 2010, the Supreme Judicial Court issued 5 an opinion answering our certified question in the affirmative. 6 Halebian III, 457 Mass. at 621, 931 N.E.2d at 987. 7 reasoned, inter alia: 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 The court If we were to adopt the plaintiff's assertion that the Legislature's inclusion of the phrase, "commenced after rejection of a demand," was intended to deny a corporation the benefit of the business judgment doctrine where it failed to reject a shareholder's demand before the filing of a derivative complaint, we would be giving § 7.44 an interpretation that would be in direct conflict with other language in the same section and that would be inconsistent with the statutory scheme embodied in the Act and reflected in the commentary of its drafters. For these reasons, despite the statute's unfortunate inclusion of a phrase that, when read in isolation, would suggest that § 7.44(a) was intended to limit dismissals under the business judgment doctrine to derivative proceedings "commenced after rejection of a demand," we conclude that the Legislature did not intend such a limitation. Rather, we conclude that the Legislature intended that a derivative action must be dismissed under § 7.44 following a corporation's independent determination, made in good faith and after reasonable inquiry, that maintenance of the derivative proceeding is not in the best interests of the 3 We added, as is our practice, that "[t]he certified question may be deemed to cover any pertinent further issues of Massachusetts law that the Supreme Judicial Court thinks is appropriate and advisable to address, including" the issues presented by Halebian's second and third claims discussed earlier in the opinion. Halebian II, 590 F.3d at 215. 9 1 2 3 4 5 corporation, regardless whether the derivative complaint has been filed before or after the corporation's rejection of the shareholder's demand. Id. at 632 33, 931 N.E.2d at 995. 6 We now resolve the instant appeal in light of the 7 careful opinion of the Supreme Judicial Court of Massachusetts in 8 response to our certified question. 9 DISCUSSION 10 I. Claims Two and Three 11 Because the Supreme Judicial Court said nothing in 12 Halebian III that affects our analysis of Halebian's second and 13 third claims as set forth in Halebian II, we affirm the judgment 14 of the district court dismissing those claims for the reasons set 15 forth in our prior opinion. See Halebian II, 590 F.3d at 207 10. 16 II. Claim One 17 The Supreme Judicial Court, in agreement with the 18 district court in this case, ruled that a defendant in a 19 derivative suit governed by Massachusetts Law may employ the 20 business judgment rule, codified at Mass. Gen. Laws ch. 156D, 21 § 7.44, to dismiss a shareholder complaint that is filed prior to 22 a corporation's rejection of the demand that serves as the basis 23 for the suit. 24 It does not follow, however, that we can affirm the district 25 court's judgment in its present form. 26 A. Halebian III, 457 Mass. at 621, 931 N.E.2d at 987. Operation of Section 7.44 10 1 As stated by the Supreme Judicial Court, the business 2 judgment rule embodied in section 7.44 "protects a corporation's 3 decision that prosecution of [a] claim demanded by [a] 4 shareholder is not in the best interests of the corporation where 5 the decision is made in good faith by independent decision makers 6 after reasonable inquiry."4 7 n.11. 8 7.44 provides that a derivative proceeding commenced either 9 before or after rejection of a demand "shall be dismissed by the 10 court on motion by the corporation if the court finds that . . . 11 a majority vote of independent directors present at a meeting of 12 the board of directors . . . has determined in good faith after 13 conducting a reasonable inquiry upon which its conclusions are 14 based that the maintenance of the proceeding is not in the best 15 interests of the corporation." 16 §§ 7.44(a), 7.44(b)(1) (emphases added). 17 to dismiss, the corporation must show by "a written filing with Id. at 627 n.11, 931 N.E.2d at 991 As applicable to this case after certification, section Mass. Gen. Laws ch. 156D, 4 Upon filing its motion In a derivative suit, of course, the plaintiff ostensibly brings his or her claims on behalf of the corporation in which he or she owns an interest, against certain corporate leadership. See 13 William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 5939. Inasmuch as it is ordinarily brought because the corporate leadership has declined to assert the claim in issue, however, the corporation is normally treated as a nominal defendant. See Meyer v. Fleming, 327 U.S. 161, 167 (1946). But see, e.g., Symes v. Harris, 472 F.3d 754, 761 (10th Cir. 2006) (aligning corporation as plaintiff where corporation was owned entirely by the plaintiffs and "no one within the company . . . would oppose bringing the suit"). It is not the nominal defendant "corporation" which moves to dismiss a derivative suit, but the actual defendants e.g., board members that make such a motion. 11 1 the court setting forth facts" that the corporation has 2 established independence, good faith, and the conduct of a 3 reasonable inquiry. 4 "dismiss the suit unless the plaintiff has alleged with 5 particularity facts . . . in its complaint or an amended 6 complaint or in a written filing to the court" rebutting the 7 corporation's filing. 8 provides that if the independence requirement in subsection (a) 9 is met, the plaintiff bears the burden of proving a lack of good Id. § 7.44(d). The court "shall" then Id. (emphasis added). The statute further 10 faith and reasonable inquiry on the part of the directors; by 11 contrast, if the independence requirement is not satisfied, the 12 corporation must prove that those two elements are present. 13 § 7.44(e). 14 Id. In ruling on Claim One, the district court adverted to 15 the fact that the plaintiff did not plead or otherwise proffer 16 "any reason why the Board's decision to reject the demand was 17 illegitimate." 18 that relying solely on the failure of the plaintiff to contest 19 the corporation's filing omits a crucial statutory step. 20 statute requires a court to "find[]" that various conditions have 21 been satisfied: that the Board is independent, and that it in 22 good faith determined after a reasonable inquiry that the 23 plaintiff's suit was not in the corporation's best interests. 24 Mass. Gen. Laws ch. 156D, § 7.44(d). 25 existence of a good-faith, reasonable inquiry into the Halebian I, 631 F. Supp. 2d at 296. 12 But we think The The latter component the 1 corporation's best interests vis-à -vis the plaintiff's suit is 2 subject to the burden-shifting provisions of subsection (e). 3 id. § 7.44(e). 4 independence of the decision maker unambiguously demonstrates 5 that the court's evaluation of independence is a prerequisite to 6 the operation of the dismissal statute in toto.5 See However, that such burden-shifting turns on the 5 Further counseling such a conclusion is section 7.44(c), which sets out various factors, none of which "shall by itself cause a director to be considered not independent for the purposes of" section 7.44. Mass. Gen. Laws ch. 156D, § 7.44(c) (emphasis added). We infer little from the inclusion of subsection (c) apart from that the Massachusetts legislature intended for the reviewing court to consider other factors in an evaluation of independence on a motion to dismiss brought under section 7.44. 13 We see no such finding of independence in Halebian I.6 1 2 Though the court's factual summary and legal discussion appear to 3 assume the Board's independence, see id. at 290, 295 96, the 4 statute by its own terms requires more, see Mass. Gen. Laws ch. 5 156D, § 7.44(a). 6 the Massachusetts Superior Court in two of only four opinions Supporting this reading of the statutory text, 6 We also are not entirely in agreement with the district court's characterization of the plaintiff's opposition to the defendants' 12(b)(6) motion. The court stated that "in opposing defendants' motion, plaintiff explicitly decline[d] to offer any reason why the rejection of the demand was illegitimate," and it expressed "concern[ about the] plaintiff's unwillingness to even attempt to engage this issue." Halebian I, 631 F. Supp. 2d at 296 n.8. However, we view the plaintiff's opposition to the defendants' motion to dismiss in this case in a different light. To be sure, the plaintiff devoted much of his memorandum of law in opposition to the 12(b)(6) motion to argument for additional discovery, rather than to a direct refutation of the defendants' section 7.44 filing. Pl.'s Mem. in Opp. to Def.'s Mot. to Dismiss Compl., Halebian v. Berv, No. 06 Civ. 4099 (S.D.N.Y. Dec. 7, 2006). But the plaintiff made clear that his goal in seeking additional discovery was precisely to rebut the Board's assertions. See, e.g., id. at 11 (asserting that defendants are "simultaneously acting as defendants, judge, and jury"), 12 (arguing that "discovery is necessary to address the danger of allowing the [Board] to appoint a few 'good ol' boys' as a special litigation committee [("SLC")] and have legitimate claims 'whitewashed' through the relative ease of constructing a record of apparently diligent investigation (internal quotation marks omitted)), 13 (expressing concern about the "strong potential for structural bias in" SLCs), 14 (articulating the "very serious danger that the [Board] . . . would be inherently biased and fail to investigate plaintiff's allegations against them and their fellow trustees in good faith"). Those statements are not factual assertions, and insofar as the district court rejected their value as such, the court clearly did not err. However, in our view, the plaintiff's opposition here did not constitute an "explicit" refusal or "unwillingness" to contest the Board's assertions under section 7.44. 14 1 of which we are aware to discuss the statute at issue here, three 2 of which are part of the same lawsuit determined that in 3 evaluating a motion to dismiss under section 7.44, the court must 4 "begin[] with an evaluation of the independence of the" board or 5 committee charged with responding to a shareholder demand. 6 v. Friendly Ice Cream Corp., No. 030003, 2006 WL 1579596, at *14, 7 2006 Mass. Super. LEXIS 241, at *47 (Super. Ct. Hampden County 8 May 24, 2006); see also Pinchuck v. State St. Corp., No. 09-2930, 9 2011 WL 477315, at *11 *13, 2011 Mass. Super. LEXIS 11, at Blake 10 *29 *36 (Super. Ct. Suffolk County Jan. 19, 2011). 11 court then embarked upon a lengthy consideration of the 12 corporation's factual submissions purporting to demonstrate the 13 independence of the members of its special litigation committee 14 ("SLC") as well as the propriety of the committee's formation, 15 evaluating their sufficiency against Massachusetts law. 16 Blake, 2006 WL 1579596, at *14 *22, 2006 Mass. Super. LEXIS 241, 17 at *47 *77; see also Pinchuck, 2011 WL 477315, at *11 *13, 2011 18 Mass. Super. LEXIS 11, at *29 *36 (conducting a factual inquiry 19 into the independence of the special committee that rejected the 20 plaintiffs' demand). 21 independence based on the court's evidentiary review, the Blake 22 court next assessed the SLC's burden under section 7.44(e) "of 23 proving that its determination was in good faith and after a 24 reasonable inquiry upon which its conclusions were based." 25 Blake, 2006 WL 1579596, at *22, 2006 Mass. Super. LEXIS 241, at The Blake See Having rejected the SLC's assertion of 15 1 *78; see also Pinchuck, 2011 WL 477315, at *13 *15, 2011 Mass. 2 Super. LEXIS 11, at *36 *42. 3 In light of the requirement that a deciding court, in 4 ruling on a motion brought under section 7.44 to dismiss a 5 derivative suit, must evaluate the movant's evidentiary 6 submissions to determine whether the corporate entity rejecting a 7 plaintiff's demand is independent, and because the district court 8 did not do so in evaluating the defendants' motion under Federal 9 Rule of Civil Procedure 12(b)(6), we vacate the court's judgment 10 as to Claim One. 11 B. 12 Relationship Between Section 7.44 and Rule 12(b)(6) In Halebian II, we noted that the plaintiff also 13 pressed the argument that even assuming section 7.44 did apply to 14 the facts of this case a question the Supreme Judicial Court 15 has now settled definitively in the affirmative the district 16 court erred by failing to convert the Board's motion to dismiss 17 into a motion for summary judgment and in barring the plaintiff 18 from seeking discovery before deciding such a motion. 19 II, 590 F.3d at 211 n.13. 20 circumstances presented here, the dictates of section 7.44 are 21 sufficiently in conflict with the contours of Federal Rule of 22 Civil Procedure 12(b)(6) as to require the district court to 23 complete its evaluation of this matter on remand by converting 24 the defendants' motion to dismiss into one for summary judgment. Halebian We now conclude that, under the 16 1 As we have noted, section 7.44 sets forth both 2 substantive standards for adjudicating the effectiveness of a 3 board's rejection of a demand and instructions regarding the 4 procedure by which that rejection must be communicated to and 5 its validity established before a court. 6 procedure requires a defendant to submit various extrinsic 7 evidentiary materials that the plaintiff may not have referenced 8 or included within his complaint. 9 § 7.44(d). 10 The dismissal See Mass. Gen. Laws ch. 156D, By contrast, the purpose of Federal Rule of Civil 11 Procedure 12(b)(6) "is to test, in a streamlined fashion, the 12 formal sufficiency of the plaintiff's statement of a claim for 13 relief without resolving a contest regarding its substantive 14 merits." 15 F.3d 150, 155 (2d Cir. 2006) (emphasis omitted); accord LaBounty 16 v. Adler, 933 F.2d 121, 123 (2d Cir. 1991). 17 does not ordinarily look beyond the complaint and attached 18 documents in deciding a motion to dismiss brought under the rule. 19 Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d 20 Cir. 2008). 21 Global Network Commc'ns, Inc. v. City of New York, 458 The court therefore On the other hand, of course, on a motion for summary 22 judgment under Federal Rule of Civil Procedure 56, the parties 23 test the substantive merits of the claim or claims and their 24 evidentiary support based on "additional supporting material" in 25 their possession or obtained during discovery. 17 Chambers v. Time 1 Warner, Inc., 282 F.3d 147, 154 (2d Cir. 2002); see Global 2 Network Commc'ns, 458 F.3d at 155 (Although Rule 12(b)(6) 3 "assesses the legal feasibility of the complaint, [it] does not 4 weigh the evidence that might be offered to support it."). 5 "matters outside the pleadings are presented to and not excluded 6 by the court, the motion must be treated as one for summary 7 judgment under Rule 56," Fed. R. Civ. P. 12(d), in order to 8 ensure that the party against whom the motion to dismiss is made 9 may respond. 10 When Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992). 11 The procedure contemplated by section 7.44 of the 12 Massachusetts statute does not easily fit within the constraints 13 of Rule 12(b)(6), even as it has been broadened by occasional 14 judicial glosses on its terms.7 15 Rule 12(b)(6) is, at bottom, a declaration that the plaintiff's While a dismissal pursuant to 7 There are exceptions to Rule 12(b)(6)'s general prohibition against considering materials outside the four corners of the complaint. For example, it is well established that on a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), the court may also rely upon "documents attached to the complaint as exhibits[] and documents incorporated by reference in the complaint." DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (citing Chambers, 282 F.3d at 153). Courts may also properly consider "matters of which judicial notice may be taken, or documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit." Chambers, 282 F.3d at 153 (ellipsis omitted) (quoting Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993) (dicta)). In Chambers, we noted that "a plaintiff's reliance on the terms and effect of a document in drafting the complaint is a necessary prerequisite to the court's consideration of the document on a dismissal motion; mere notice or possession is not enough." Id. (emphasis in original) (citing Cortec, 949 F.2d at 47 48). 18 1 complaint and incorporated materials are insufficient as a matter 2 of law to support a claim upon which relief may be granted, see 3 Cortec, 949 F.2d at 47, Massachusetts section 7.44 provides a 4 procedure by which a defendant must introduce extraneous material 5 in order to secure dismissal. 6 an initial burden on the corporation to come forward with facts 7 to show it is entitled to the section's protection." 8 Laws ch. 156D, § 7.44, cmt. 2. 9 "the corporation is required . . . to present to the court a The Massachusetts statute "imposes Mass. Gen. To avail itself of section 7.44, 10 filing containing facts justifying application of the business 11 judgment rule." 12 1579596, at *11, 2006 Mass. Super. LEXIS 241, at *38 (concluding 13 that the party moving to dismiss under section 7.44 has an 14 "initial hurdle of showing that the [board committee which 15 decided to reject the plaintiff's demand] was properly 16 constituted" and also "bears the burden of submitting a written 17 filing with the court setting forth facts to show that a majority 18 of the Board was independent when the independent directors made 19 their determination, and that the independent directors . . . 20 made the determination in good faith after conducting a 21 reasonable inquiry upon which its conclusions are based"). Id.; see id. § 7.44(d); see also Blake, 2006 WL 22 According to the statute, then, the corporation first 23 must file its motion to dismiss and "make a written filing with 24 the court setting forth facts to show . . . whether a majority of 25 the board of directors was independent at the time of the 19 1 determination by the independent directors." Id. § 7.44(d). 2 as discussed in Part II(A), above, the trial court determines 3 that the board is independent, the plaintiff bears the burden of 4 demonstrating that the independent directors did not make the 5 determination "in good faith after conducting a reasonable 6 inquiry upon which their conclusions are based."8 7 7.44(d), 7.44(e). 8 suit unless the plaintiff has alleged with particularity facts 9 rebutting the corporation's filing in its complaint or an amended If, Id. §§ In this scenario, "the court shall dismiss the 10 complaint or in a written filing with the court." Id. Thus the 11 state statute explicitly contemplates an additional opportunity 12 for the plaintiff to rebut if he or she has not done so in the 13 original complaint the defendant's factual showings of 14 independence, good faith, and reasonable inquiry, either through 15 an amended complaint or some other "written filing with the 16 court."9 See Blake, 2006 WL 1579596, at *11, 2006 Mass. Super. 8 If the court concludes the board is not independent, the burden shifts to the defendant in demonstrating good faith and a reasonable inquiry. Id. § 7.44(e). 9 Section 7.44 permits plaintiffs to dispute by "alleg[ing] with particularity facts rebutting the corporation's filing" in three distinct ways: (1) pointing the court back to allegations made in the plaintiff's initially filed complaint; (2) filing an amended complaint; and (3) making some other "written filing." Mass. Gen. Laws ch. 156D, § 7.44(d). In responding to a defendant's 12(b)(6) motion to dismiss in federal court, a plaintiff will generally have the ability to identify allegations in the complaint, or amend the complaint to add specific allegations, which call the purported bases for dismissal into question. See Fed. R. Civ. P. 15(a)(1)(B), 15(a)(2). Insofar as that is the case, section 7.44 would likely not conflict with the Federal Rules of Civil Procedure. As, however, the instant case implicates section 7.44(d)'s third, "written filing" response 20 1 LEXIS 241, at *38 ("If the SLC satisfies this burden of setting 2 forth such facts regarding independence and the plaintiff alleges 3 with particularity facts rebutting the SLC's written filing under 4 § 7.44(d), the court assesses the evidence as to whether or not 5 the SLC was independent and whether it determined in good faith 6 after conducting a reasonable inquiry upon which its conclusions 7 are based that maintenance of the derivative proceeding is not in 8 the best interests of the corporation."). 9 requires that discovery be stayed upon the filing of the motion 10 to dismiss and the required supporting materials until the court 11 rules on the motion, unless a motion for discovery is made and 12 "good cause" shown for "specified discovery." 13 ch. 156D, § 7.44(d). 14 Section 7.44(d) also Mass. Gen. Laws Insofar as the section 7.44 procedure encourages or 15 requires the parties to submit, and under which it is expected 16 that the court will review, evidentiary materials outside the 17 scope of what the plaintiff has already included or incorporated 18 into his or her complaint, the section 7.44 procedure appears to 19 be incompatible with a federal court's limited powers to grant a 20 Rule 12(b)(6) motion to dismiss. 21 the possibility that there may be cases in which the two regimes Although we cannot foreclose and given that, in any event, section 7.44 requires an initial supplementary evidentiary filing by the moving defendant we still view the two procedural dictates as incompatible, at least on the facts before us here. See also infra note 10 and accompanying text. 21 1 would not conflict,10 this is not one of them. 2 submitted by the defendants to comply with section 7.44 fall 3 outside the bounds of what a federal court may properly consider 4 on a Rule 12(b)(6) motion, and the district court must examine The materials 10 For example, if a plaintiff files his or her complaint after the board of directors has already formally rejected the demand, a federal district court faced with a motion to dismiss might deem the board's written rejection of the plaintiff's demand to be incorporated by reference within, or integral to, the plaintiff's complaint. That, we surmise, would obviate one of the potential conflicts between section 7.44 and Rule 12(b)(6). Moreover, even where a plaintiff files his complaint before a board's formal rejection of his demand, there might be cases in which conversion will be unnecessary for instance, if a court permits the plaintiff to amend her complaint after the board's rejection, the court might very well consider the written rejection to be properly incorporated by reference. In such a circumstance, a Rule 12(d) conversion might be unnecessary to a district court's evaluation of evidence regarding the inquiries mandated by section 7.44, in light of the policies undergirding the conversion rule. See Cortec, 949 F.2d at 48 ("Where plaintiff has actual notice of all the information in the movant's papers and has relied upon these documents in framing the complaint the necessity of translating a Rule 12(b)(6) motion into one under Rule 56 is largely dissipated."). Even though we decline to rule out the possibility that a case of that nature will eventually arise in this Circuit, we do note that a conclusion contrary to ours here might be in tension with Circuit law governing the incorporation of material into a complaint. See, e.g., Global Network Commc'ns, 458 F.3d at 157 ("In most instances where th[e 'integral to the complaint'] exception is recognized, the incorporated material is a contract or other legal document containing obligations upon which the plaintiff's complaint stands or falls, but which for some reason . . . was not attached to the complaint. The exception thus prevents plaintiffs from generating complaints invulnerable to Rule 12(b)(6) simply by clever drafting."). In this case, though, the district court necessarily relied on the defendants' extrinsic submissions in granting dismissal to the defendants. Although the court was careful to disclaim any consideration of materials improperly before it on a 12(b)(6) motion, see Halebian I, 631 F. Supp. 2d at 287 n.1, we conclude that on the instant facts, the dictates of section 7.44 made such a task impossible. 22 1 those materials in order to make the findings mandated by section 2 7.44 as a prerequisite to dismissal. 3 circumstances, we instruct the district court, on remand, to 4 adjudicate the claim within the framework of summary judgment by 5 converting the defendants' motion to dismiss pursuant to Federal 6 Rule of Civil Procedure 12(d). 7 276, 285 (3d Cir. 2005) (discussing a New Jersey state procedural 8 rule applicable in shareholder derivative cases and concluding 9 that "it would be better for the [d]istrict [c]ourt to consider Because of these unique See Fagin v. Gilmartin, 432 F.3d 10 [the sufficiency of the board's rejection of a shareholder 11 demand] on summary judgment," rather than on a motion to 12 dismiss). 13 C. Discovery 14 Although Halebian contended in the district court, and 15 does so again on appeal, that he should have been afforded the 16 opportunity to conduct additional discovery in order to rebut the 17 Board's filing, under both Federal Rule 56 and section 7.44, the 18 availability of further discovery is a matter within the district 19 court's discretion. 20 appellate panel remanding to the district court for resolution by 21 summary judgment "d[id] not intrude on the [district c]ourt's 22 discretion as to the extent of discovery it needs to decide the 23 issue"). 24 court may well have acted within its discretion in denying the 25 plaintiff's request for discovery, particularly in light of the Cf. Fagin, 432 F.3d at 285 (noting that the While we decline to decide the question, the district 23 1 defendants' submission of "thousands of pages detailing the 2 backgrounds of the directors at issue, as well as the extensive 3 efforts made by the independent counsel in preparing its review 4 of the demand for the committee and the Board." 5 F. Supp. 2d at 298. 6 any such application by the plaintiff for more discovery in light 7 of Rule 56 case law and procedures would be advisable on remand. 8 9 Halebian I, 631 We nonetheless think that a reevaluation of In rejecting the plaintiffs' discovery request, the district court wrote: "Absent a specific allegation in the 10 complaint as to why the Board was not disinterested, nor why the 11 demand was refused, and absent a specific argument from plaintiff 12 as to what more discovery would yield, we decline to allow 13 plaintiff to avail himself of a premature opening of the 14 floodgates to discovery in an effort to cure the deficiencies in 15 the complaint."11 16 addition, the district court suggested that the plaintiff even 17 though filing his complaint before the Board's rejection might 18 have anticipated that he would have to make allegations about 19 independence, and therefore could have done so in the original Halebian I, 631 F. Supp. 2d at 298. 11 In We note that the various allegations in plaintiff's opposition to the defendants' motion discussed in note 6, supra, seem to us to arguably present "a specific argument . . . as to what more discovery would yield," Halebian I, 631 F. Supp. 2d at 298. Whether the plaintiff's arguments on that issue are convincing, though, is a question left to the sound discretion of the district court on remand. 24 1 filing.12 2 to have made "specific allegation[s]" in the complaint as to "why 3 the demand was refused" when the Board had not yet taken final 4 action on the plaintiff's demand at the time his complaint was 5 filed. 6 the content of the defendants' submissions on its motion to 7 dismiss and preemptively rebut those submissions in its 8 complaint. But we do not see how the plaintiff can be expected And the statute does not require the plaintiff to predict 9 CONCLUSION 10 For the foregoing reasons, we affirm the judgment of 11 the district court dismissing Claims Two and Three of the 12 complaint. 13 judgment dismissing Claim One under Rule 12(b)(6) and remand this 14 matter to the district court for its resolution of Claim One in a 15 manner consistent with this opinion. 12 We vacate that portion of the district court's The court stated: We realize that the complaint could not have pled reasons why the Board's decision to reject the demand was improper in light of the fact that the complaint was filed prior to the rejection. However, the complaint could have asserted various reasons as to why the Board was constituted of interested trustees, or why the [Board's demand review committee], as constituted, was inadequate as a review mechanism for the Board. Halebian I, 631 F. Supp. 2d at 296 n.8. 25
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